Personality, IQ, and Lifetime Earnings
48 Pages Posted: 14 Jun 2014
Talented individuals are seen as drivers of long-term growth, but how do they realize their full potential? In this paper, I show that even in a group of high-IQ men and women, lifetime earnings are substantially influenced by their education and personality traits. I identify a previously undocumented interaction between education and traits in earnings generation, which results in important heterogeneity of the net present value of education.Personality traits directly affect men's earnings, with effects only developing fully after age 30. These effects play a much larger role for the earnings of more educated men. Personality and IQ also influence earnings indirectly through educational choice. Surprisingly, education and personality skills do not always raise the family earnings of women in this cohort, as women with very high education and IQ are less likely to marry, and thus have less income through their husbands. To identify personality traits, I use a factor model that also serves to correct for prediction error bias, which is often ignored in the literature. This paper complements the literature on investments in education and personality traits by showing that they also have potentially high returns at the high end of the ability distribution.
Keywords: personality traits, social skills, cognitive skills, returns to education, life-time earnings, Big Five, human capital, factor analysis
JEL Classification: J24, I24, J16
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